Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie…read more

Triangulating Brexit

BRUSSELS – More than 100 days after the United Kingdom voted narrowly to leave the European Union, it remains far from clear what arrangement will regulate cross-Channel trade after Brexit. Political discussions tend to revolve around three key issues: immigration controls, access to the single market, and passporting rights for financial services. Which balance should European leaders strike?

Many in Britain know exactly what they want: to impose controls on the movement of workers from the rest of the EU, thereby protecting the domestic labor market, but without losing access to the single market or passporting rights, which allow British firms to sell their financial services on the continent. That was, after all, the kind of deal many leaders of the “Leave” campaign promised before the June referendum.

But the Brexiteers’ promise remains wishful thinking. As German Finance Minister Wolfgang Schäuble has pointed out, access to the single market is inextricably linked to the free movement of people. Indeed, he has even offered to send Boris Johnson, the UK’s foreign secretary, a copy of the Treaty of Lisbon, where that link is established.

This may sound legalistic, and it certainly reflects political motivations. But basic economic principles imply that free movement is, indeed, at least as important as free trade.

Trade usually benefits both sides. It is thus clear that it is in the common interest of the UK and the EU to minimize the losses from the introduction of new barriers through Brexit. From the point of view of European welfare, it is the size of the trade barriers that matters, not which side is a net exporter or importer. Low barriers typically have low costs, unless very large volumes of trade are affected. But as barriers become higher, the negative impact on welfare grows disproportionately.

The good news for the UK is that it probably wouldn’t face substantially higher trade barriers even if it did leave the single market. After all, the EU has, in general, a liberal trade regime, with low external tariffs. That is why so many studies do not consider the economic benefits of tariff-free transatlantic trade as the primary reason for pursuing it.

Even if the UK faced some additional barriers – such as new customs requirements and certificates of origin – their impact would most likely be relatively small. The case of Switzerland – which is even more integrated into EU production chains than the UK – shows that efficient customs administrations on both sides are enough to keep such barriers to a minimum. In any case, exports of goods to the EU generate only about 6% of the UK’s GDP.

Yet another reason why the introduction of some low trade barriers is unlikely to produce large losses is that the differences in the cost of producing goods in one market or the other are small. Producing a car in Britain, for example, costs about the same as producing one in Germany.

Barriers to the free movement of labor are a different story. Productivity and income per worker in the UK remains significantly higher than in, say, Poland. A worker would get about €25 ($27.70) for an hour of work in the UK, but only €8.50 in Poland. In other words, not allowing a Polish worker to work in the UK would imply large economic costs for Europe. Moreover, if British Prime Minister Theresa May follows through on her stated goal of reducing annual net immigration to less than 100,000, the UK would have to implement drastic – potentially costly – measures to close off the UK labor market.

This means that the barriers that EU negotiators are in a position to impose – which largely affect trade in goods – are likely to have a much smaller impact than the UK-imposed barriers, such as quotas on EU workers. But there is one more issue that negotiators must consider: financial services.

While overall trade in services is unlikely to suffer enormously from Brexit – the internal market for services never worked all that well, anyway – finance constitutes a special case, largely because of the passporting arrangements for banks.

Economists are often ambivalent about the benefits of financial integration, not least because large flows of bank credit can have a serious impact on macroeconomic stability. Whereas securitization, for example, can help to reduce risk and increase the availability of credit for risky borrowers under the right framework, the 2008 global financial crisis starkly demonstrated that it can imply huge costs if it goes too far.

But steps can be taken to maximize the benefits of cross-Channel provision of financial services after Brexit. The key is to base decisions not on sustaining the City of London’s role as Europe’s financial hub, but on ensuring that the services provided strengthen Europe’s capital markets. That would require an emphasis on equity over debt instruments, and on market-based financing over bank credit.

From an economic standpoint, the priorities that should guide Brexit negotiations are clear. Negotiators must focus on minimizing new barriers to the free movement of labor; indeed, this should be an even higher priority than maintaining the free movement of goods. And British financial services should be welcomed in the EU, but only if they help it to move away from its bank-centric system and complete the capital market union.

But politics continues to distort discussions, driving leaders to draw red lines on free movement and adopt mercantilist stances on financial services. It will take some statesmanship on both sides to shift attention to the common good.

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I am sure that the EU / Canada deal does not impose the same sort of "free movement" obligations foisted on the UK. Equally, if as some argue the EU is "work in progress" then it should have had the humility to review the "free movement" obligation and see whether in fact it is killing the EU and if this requirement is in fact in need of better fine tuning.

It cannot possibly be right or fair, that failing economies like Poland export large numbers of their people so that their people can find jobs not available back home. No one would grumble if the numbers were in the low thousands, but when you get a million people just up and leave and move into the UK, let alone the other Poles who have moved into other countries, you have to ask the question if this "free movement" is more like a nuclear bomb under societies, forced, without consultation to receive massive inflows of people, into societies who don't have the homes; infrastructure, or cultural preparation to accept them.

To me the absolute stupidity of the elites in the EU is their continuing failure to listen, review and adapt. They seem to have one direction of travel (more and deeper) they never review or improve policy they just drive it deeper into the earth.

People are long past the point they are prepared to put up with such nonsense any loner, frankly if the Brussels elites can't see what needs to be done, try and rescue the situation with the UK and start dealing with the existential problems facing us all then they are not fit for office and should be sacked and replaced by pragmatic realists who understand Europe cannot stand a massive rupture, what is needed is fairness, balance and vision.

Sadly none of the Tusk; Schultz; Junker team have much of this. They are far too concerned about protecting the people Brussels support to worry about the common man being crushed under failing policies - the fact you can't sack them as they were never elected is another huge problem - why would Europe want to be run as a dictatorship with failures at the helm who have lost our respect? That is the truth of it.

Brexit is not just about the deal the British want from Europe, Brexit is the canary in the coal mine telling Europe it is failing and sinking fast and what the hell are they going to do about it? Read more

This article repeats the common and mistaken argument that some economic imperative requires the EU to offer 'free' trade in goods only if it also requires free immigration. There is absolutely no economic justification for this position. A bilateral trade agreement reducing tariffs on certain sectors to zero while preserving tariffs in others, is still a better arrangement than high tariffs in all sectors. Free trade in goods across the EU, even with immigration restrictions, would not be as optimal as free trade in both, but would still produce a huge net benefit.If the Brits want to overpay for their local services, let them.The argument for free immigration as always been a political (political and cultural harmonization) and developmental (faster development of eastern europe). But many in Europe are explicitly rejecting the desirability of cultural homogenization. The real reason why the EU is so violently opposed to a UK immigration exception is the fear that it will lead to exceptions all over Europe, undermining the political dream of a 'united' Europe, and ultimately leading to the rabid tribalism of the early twentieth century. We can debate whether that dystopian concern is real (I personally don't think so), but let's not obscure this by suggesting an economic imperative. Yes, free immigration produces greater economic efficiency , but it will produce no economic benefit at all if a political reaction to it leads to a reduction in trade in goods as well. This is the risk evident in Brexit and possibly also in the USA.Read more

Jack, there is a very simply method to deal with the "exceptionalism" issue which is so obvious I can't actually understand why the politicians can't see it.

All that needs to be done is to set "parameters" on free movement. They basically set out the limits by which free movement would have to be regulated in some way. So rather than saying every country has an open door to every other, there is a caveat attached to that they could be as follows (all or some of them, depending on societal needs)

1) That people can only move to another country if they have a job and are able to provide for themselves for at least five years and they have to return to their place of origin if they fail to regain employment within the five year period. Also welfare is not paid to anyone until contributions are received for at least five years2) Population density : for any country who has a density of population that is already deemed to be overcrowded (Netherlands and the UK) are amongst the highest in Europe, then those countries have the liberty to regulate inflows

3) Housing shortages: Any country that has a housing shortage it cannot deal with and as such is unable to house its own people let alone millions wanting to move to it from the EU has the right to restrict population in flows

YOu could have a small number of parameters and countries that meet the various parameters have the freedom to manage population movement - it seems very obvious to me.

No one is saying people cannot holiday/travel or have short stays in a country with friends and families - the problem that the UK faces and also the Netherlands is that far too many people want to move to the country and there simply is not enough housing for everyone.

Gross distortions in the system have to be dealt with. The EU cannot sit on its hands and failing to support countries in distress otherwise Brexit is the outcome. Read more

"But politics continues to distort discussions, driving leaders to draw red lines on free movement and adopt mercantilist stances on financial services. It will take some statesmanship on both sides to shift attention to the common good."Your summation is entirely correct. What we seem to have concentrated upon to date is what the UK wants from such a deal, but frankly that is the least awkward part of the discussion. There would probably be some middle ground on restricting benefits or numbers of people who do not have guaranteed jobs - and there could be some price to pay for continuing the City's involvement in EU financial services, not least to avoid the risks of chaos as ten different centers vie against each other to replace it.What we should concentrate upon is what on earth could be done to avoid the enormous delays on the other side when trying to negotiate any trade deals. CETA is one clear example, while India is another; nine years on and no sign of a deal in sight. The EU structure of vetos is so damaging to any cohesive policy, it is impossible to see how any Brexit deal can be achieved, certainly within the two year period after Article 50.There needs to be a sensible discussion, including the UK, between EU leaders - as soon as possible (and before Article 50) - to agree on a way for the 27 to be able to complete a deal. If there is not, (and I admit this sounds like a threat, but may be the only way to bring about an agreement, or decision to stay together) is for the UK to use its veto on any plans (on any aspect) that the EU has which are not entirely to its liking.The better alternative is for the EU 27 to agree that a simple majority vote is all that is needed - and a timetable to keep the negotiations to less than, say, one year from Article 50, so there is real impetus to resolve this without too much harm to all. Read more

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